TSMC: a semiconductor goldmine


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In the recent news there has been increased geopolitical activity around Taiwan. Historically China has seen Taiwan as its disobedient province, that should be returned to its “mother”. The Taiwanese, naturally, don’t see it that way. Add the involvement from the U.S., Japan and other countries, and you get quite a toxic mix in the region.

Among other things, Taiwan is a home to TSMC – Taiwan Semiconductor Manufacturing Company, Limited. This is a semiconductor company with a horrible name…and a complete domination of the world’s semiconductor market.

The story of this business is fascinating, and it remains core to Taiwanese economy AND that of China, U.S. and many others. Let’s take a look at how it was built up, and why sometimes being too big is not so great, as governments get involved in your business, and you become a vital component of people’s everyday life.

The rise of Morris Chang

From there Chang’s stellar rise would see him end up at a large company called Texas Instruments (TI), climbing all the way up the corporate ladder over the course of 35 years. Notably, one of the positions that he held there was Vice President of the semiconductor business.

However, in 1983, Chang was passed up for a promotion, and he resigned from the company at the ripe age of 52. Believe it or not, this is where the incredible story of the Taiwanese semiconductor company only begins.

The Taiwanese cry for help

From 1984 until 1985, Morris Chang served as the President of TI’s main competitor – General Instrument Corporation. In 1985, the government of Taiwan called upon him to help the country build its new-born semiconductor industry. The company founded and led by Chang became known as Taiwan Semiconductor Manufacturing Company, Limited (TSMC).

Semiconductors are an essential component of many electronic devices nowadays. Their importance was first underlined in the 60’s when computers were becoming used more and more often by NASA. In the last half a century the semiconductors industry grew exponentially into areas such as: defence (think missiles), mobile phones, telecommunications, car-manufacturing and many more. In 2020, global chip sales were estimated to be at $440 billion.

Taiwan, an island where the nationalist government of China fled to in 1949, after losing the Civil War in China, wanted to bet a lot of their “chips” on semiconductors in 1985 when they turned to Morris Chang. It was time to make money.

The biggest problem at the time in Taiwan was that there were qualified manufacturers and designers of semiconductors, but they simply did not have the funding to start up their own companies. Chang understood that the manufacturing capability was certainly there, despite the lack of any other infrastructure.

To address this issue, TSMC allowed smaller manufacturers to make products (and profit from them) under its umbrella, while pocketing a large chunk of the revenue. Chang would lead the development of a huge ecosystem of “fabless” – “design-only” – chip companies. As the cost of technologies grew, outsourcing became very popular, especially in the U.S., and that is where TSMC grabbed the majority of the semiconductor market.

Problems on the horizon

Born into a local government official’s family in China in 1931, Morris Chang has seen his fair bit of hardship. Fleeing from poverty and wars, in 1948 Chang’s family moved to Hong Kong, and in 1949 18 year old Morris was accepted into Harvard University in the United States. One year later, he transferred to MIT (Massachusetts Institute of Technology) to study engineering.

Morris Chang stepped down as the CEO in 2018, at the age of 86 (!). As of 2021 his successor, C.C. Wei heads the company.

However, the geopolitical scene looks like it may threaten the business that has thrived for so long. Xi Jinping of China has repeatedly in his rhetoric referred to Taiwan as the “breakaway province” – i.e. China must eventually retake what is rightfully theirs. With U.S. stepping down its military presence globally, it is indeed a worrying sight. The pandemic of 2020 underlined the importance of semiconductors when the reported shortage sent many companies into a panic mode. TSMC struggled but got back on its feet.

Chinese interest in the company – and subsequently the territory – is obvious. If the Eastern dragon is able to gain control of TSMC, it will have the ultimate chip to play against the American eagle, who loves to impose their sanctions against others. In this case, China can single-handedly cripple a lot of industries that make the economy of the U.S. tick.

Government and companies

Therefore, no one should be surprised that the subject matter is coming up more and more often in the news. TSMC that was built at the end of the day thanks to the efforts by the government of Taiwan is now under threat, like no other company in the world, because of the political agenda of another country.

This of course raises many questions about other companies that are funded by and enjoy the protection by governments – think SpaceX in the Untied States, and Xiaomi in China. While that is a huge market advantage, does that leave you exposed to other “big guys” (governments), who could take a swing at you if you ally yourself with their political opponent?

The trade-off here is not so unclear. Any business founder would take a grant from the government without skipping a heartbeat, if they believe that it will improve the performance of their company and give them competitive advantage. However, there is certainly a case of becoming “too entrenched” and “too big for everyone’s liking”. Monopolies attract attention.

If we look at the likes of Facebook, it is under constant attacks at the moment. Even more so, it is under the threat of being broken up. Would the next big player tread carefully, and perhaps seek to go by principal “less is more”? We shall see, but if history is a judge, that is unlikely to be the case. Growth has always been the name of the game. In the case of TSMC and it is certainly in a dominant position market-wise. However, having all of its major operations in one country now contains an inherent takeover risk. Perhaps diversifying their factories to other countries could help mitigate that risk… But, as of this moment, it seems like it’s too late.

What are the lessons here

There is a lot we can learn from the above case and the story of Morris Chang and TSMC:

  1. If you have the experience and expertise in a particular industry, don’t be afraid to stand your ground. Your value in the market will not diminish if you leave the company, as there would be plenty of players who would look to “snap you up” and make use of that experience and expertise.
  2. Identifying one major advantage and entering the market early is the key.
  3. If the government is giving you money, you can hardly say no. But understand that it comes with certain risks and strings attached.
  4. Monopolies are frowned upon – the longer you can fly under the radar, the better.

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